Reasons why Russia and Turkey are reconciling

June 30 2016

RIR

Alexey Lossan

For a long time, Turkey was the main supplier of fruits and vegetables to Russia, but during the first seven months after the rupture in trade, their supplies were embargoed. Source: Alexey Malgavko/RIA Novosti

Alexey Malgavko/RIA Novosti

Russia and Turkey are strategic partners on a variety of issues, ranging from gas supplies to the development of tourism and construction.

Turkey and Russia appear close to reconciliation. Russian President Vladimir Putin was scheduled to speak on the phone with the Turkish President Recep Tayyip Erdogan on June 29, 2016, for the first time since November 2015, when the Turkish Air Force shot down a Russian Su-24 bomber near the Turkish-Syrian border. Several days ago, on June 27, the Turkish leader apologized for the downing of the Russian aircraft.

There are objective reasons, analysts said, for a possible reconciliation between Russia and Turkey. The rupture in relations has hit both countries hard.

"Turkey itself has assessed the losses from the sanctions at $9 billion a year,” Georgy Vashchenko, head of Russian stock market operations at the Freedom Finance investment company, told RIR. “This is around 1.2 percent of its GDP."

The largest losses, Vashchenko said, were in tourism revenues, of more than $5 billion. The losses related to textile exports amounted to more than $1.2 billion a year. Russian estimates indicate that reduction in turnover because of sanctions is more than $11 billion, he added.

Turkey is the second largest consumer of Russian gas

Turkey is Gazprom's second largest market after Germany. Russia's Gazprom delivered 26.9 billion cubic meters of natural gas to Turkey in 2015, accounting for 55 percent of its needs.

Earlier, in December 2014, Gazprom and Turkish company BOTAS signed a memorandum on the construction of a second gas pipeline under the Black Sea, the Turkish Stream, with a capacity of 63 billion cubic meters of natural gas per year. The project was shelved after the rupture in relations between Turkey and Russia. However, Turkey was unable to find alternative suppliers of natural gas and continued to buy Russian gas from existing pipelines.

In the event relations between the two countries are normalised, Gazprom is open to a dialogue on the Turkish Stream, a recent announcement by the Russian company stated.

Turkey is the main foreign market for Sberbank

The most valuable foreign asset of Sberbank, Russia's largest state-owned bank, is located in Turkey. Sberbank bought Turkey's DenizBank for $3.5 billion in June 2012. From a financial point of view, the investment has not been very successful: capitalization of the Turkish bank has been constantly decreasing since then. DenizBank's capitalization plummeted to $2.6 billion in June 2016.

According to the Russian business newspaper Vedomosti, Sberbank was willing to sell its foreign asset. However, Sberbank has officially always denied rumours concerning the sale of DenizBank: it still accounts for around 9 percent of the Russian bank's assets.

Russians need Turkish resorts

Despite development of domestic tourism, Russian tour operators have not been able to find an alternative to Turkish hotels.

The number of searches on package holiday tours in May 2016 decreased by 15.5 percent compared to the same period in 2015, Russian business daily Kommersant reported, citing analytical data of the Association of Tour Operators of Russia. According to Association data, 20 percent of customers who stopped searching have been deciding not to go abroad at all in the absence of affordable foreign destinations.

"If there is a favourable decision on resumption of cooperation with Turkey, the holiday demand from Russian tourists could recover quickly," the Association said on its website.

Turkey is a supplier of fruits and vegetables

Russia imposed a ban on supply of major food products from Turkey after relations between the countries broke down. Turkey has, for a long while, been the main supplier of fruits and vegetables to Russia. During the first seven months after the rupture in trade, fruit and vegetable supplies from Turkey were embargoed. As a result, according to data from the Ministry of Economic Development, food imports from Turkey decreased by $274.6 million in the first four months of 2016, compared with the same period last year. In fact, supplies decreased to zero. In comparison, before Russia imposed sanctions on Turkish fruits and vegetables, almost 53 percent of total tomato imports to Russia in cash, and 54 percent through trade, came from Turkey, the RBC business newspaper reported.

Turkish builders rebuilt the State Duma building

Turkish construction firms have executed some of the most important projects in Moscow. The company Enka renovated the building of the State Duma, the lower house of parliament, while Renaissance Construction built the office for Gazprom in St. Petersburg.

According to Kommersant, the aggregate turnover of Turkish real estate developers in Russia recently totalled 50 billion rubles ($773 million) annually. After relations between the two countries deteriorated,Turkish companies were allowed to complete only projects that they had already begun.

"The return of Turkish construction companies to Russia will be a step-by-step process, which will take at least several months," Yaroslav Kabakov, Finam's Deputy CEO, said.